Chap III: THE ADJUSTING PROCESS

• INTRODUCTION
• This chapter talks about two ways of doing accounting:
• 1. Cash basis accounting: It records only cash receipts and cash payments. It ignores
receivables, payables and depreciation.
• 2. Accrual accounting: It records the effect of each transaction as it occurs revenues
are recorded when earned and expenses are recorded when incurred
• Four principles are guiding this work:
1. Accrual accounting versus cash-basis accounting
2. The accounting period :( 12 months)
3. The revenue principle : ( record revenue when it is earned)
4. The matching principle : (Measures all expenses and matches the expenses against
the revenues of the period)
• The Trial Balance is the tool for adjustment. Before adjustments, the Trial balance is
unadjusted trial balance, because there are some revenues and some expenses not
yet recorded.
 Chap III Cont’
• Five things we refer to in adjusting process
 Prepaid expense
 Unearned service revenue
 Accrued expense
 Accrued revenue
 Accumulated depreciation
 Chap III Cont’
• Illustration:
• Jackline business rented a office on 1st October
2019 from Nicole, paying cash of 600,000Rwf
for 6 months (100,000Rwf /month)
• Question: Record in the journals of both
Jackline and Nicole businesses transactions on
1st oct 2019, 31/10; 30/11 and on 31/12/2019
 Journal in the book of the Jackline Prepaid
expense
Date Accounts and explanation Dr Cr
Oct 1, 2019 Prepaid rent 600,000
Cash 600,000
Oct 31, 2019 Rent expense 100,000
Prepaid rent 100,000
Nov 30, 2019 Rent expense 100,000
Prepaid rent 100,000
Dec 31, 2019 Rent expense 100,000
Prepaid rent 100,000
Jan 31, 2020 Rent expense 100,000
Prepaid rent 100,000
Feb 29, 2020 Rent expense 100,000
Prepaid rent 100,000
Mar 31, 2020 Rent expense 100,000
Prepaid rent 100,000
 Journal in the books of Nicole
Unearned service revenue
Date Accounts and explanation Dr Cr
Oct 1, 2019 Cash 600,000
Unearned service revenue 600,000
Oct 31, 2019 Unearned service revenue 100,000
Service revenue 100,000
Nov 30, 2019 Unearned service revenue 100,000
Service revenue 100,000
Dec 31, 2019 Unearned service revenue 100,000
Service revenue 100,000
Jan 31, 2020 Unearned service revenue 100,000
Service revenue 100,000
Feb 29, 2020 Unearned service revenue 100,000
Service revenue 100,000
Mar 31, 2020 Unearned service revenue 100,000
Service revenue 100,000
 Accrued expense and
Accrued revenue
• Suppose that Jackline is not able to pay 6
months rent from 1st April up to 30th
September 2020
• She will pay on 10th May 2020. In the book of
Jackline, the business will write for accrued
expense at the end of April 2020 which
creates a payable
• In the book of Nicole, she will write for
accrued revenue at the end of April 2020
which creates a receivable
 Journal in the book of the Jackline
Accrued expense
Date Accounts and explanation Dr Cr
Apr 30, 2020 Rent expense 100,000
Accounts payable 100,000
May 10, 2020 Account payable 100,000
Prepaid rent 500,000
Cash 600,000
May 31, 2019 Rent expense 100,000
Prepaid rent 100,000
June30, 2020 Rent expense 100,000
Prepaid rent 100,000
Jul 31, 2020 Rent expense 100,000
Prepaid rent 100,000
Aug 31, 2020 Rent expense 100,000
Prepaid rent 100,000
Sep 30, 2020 Rent expense 100,000
Prepaid rent 100,000
Journal in the books of Nicole: Accrued
revenue /Unearned service revenue
Date Accounts and explanation Dr Cr
Apr 30, 2020 Accounts receivable 100,000
Service revenue 100,000
May 10, 2020 Cash 600,000
Accounts receivable 100,000
Unearned service revenue 500,000
May 31, 2019 Unearned service revenue 100,000
Service revenue 100,000
June 30, 2020 Unearned service revenue 100,000
Service revenue 100,000
Jul 31, 2020 Unearned service revenue 100,000
Service revenue 100,000
Aug 31, 2020 Unearned service revenue 100,000
Service revenue 100,000
Sep 30, 2020 Unearned service revenue 100,000
Service revenue 100,000
 Accumulated depreciation
• When a business purchases a fixed asset, this asset
will be used for a determined period of years. For
instance Jackline’s business purchased a laptop at
300,000Rwf on 1/1/2016 with 5 years life, then it
will be replaced by purchasing a new one. The
business will put aside 300,000Rwf/5 =60,000Rwf
per year, as an expense called depreciation expense.
The account called accumulated depreciation is a
contra-asset because it will reduce the value of asset
purchased and it has credit balance.
 Accumulated depreciation Journal
Date Accounts and explanation Dr Cr
Jan 1, 2016 Laptop/Equipment 300,000
Cash 300,000
Dec 31, 2016 Depreciation expense 60,000
Accumulated depreciation, laptop 60,000

Dec 31, 2017 Depreciation expense 60,000

Accumulated depreciation, laptop 60,000
Dec 31, 2018 Depreciation expense 60,000
Accumulated depreciation, laptop 60,000
Dec 31, 2019 Depreciation expense 60,000
Accumulated depreciation, laptop 60,000
Dec 31, 2020 Depreciation expense 60,000
Accumulated depreciation, laptop 60,000
 Table of adjustment
• The adjusting table has 4 main columns:
 Column of accounts
 Column of amounts of TB (Dr and Cr)
 Column of adjustment (Dr and Cr)
 Column of Adjusted TB ( Dr and Cr)
 Table of adjustment

Accounts Trial balance Adjustment Adjusted Trial

balance
Dr Cr Dr Cr Dr Cr
Cash
Accounts receivable
Application on 31/12/2012

December 31,2012
 Data for adjustment
a. Depreciation on equipment, $1,100.
b. Accrued wage expense, $600.
c. Supplies on hand, $300.
d. Prepaid insurance expired during December,
$200.
e. Unearned service revenue earned during
December, $4,000.
f. Accrued service revenue, $800.
 Requirements
• 1. Prepare the adjusted Trial Balance
• 2. Journalize the adjustment
• 3. Prepare the income statement
• 4. Prepare the Owner equity statement
• 5. Prepare the Balance Sheet

NB: It will be done in chapter 4

Adjusted Trial Balance
Journalizing the adjustment
 Prepare financial statements
• Those financial statement will be prepared in
chapter 4
• 1. Income statement
• 2. Owner’s equity statement
• 3. Balance sheet
Important terms to be known for adjustment

• 1. “…used”, “… earned”, “… expired”: it means the amount

written into the data will be considered as it is for debit
and credit
• 2. “… on hand”, “…not yet used”, “… still in force”: It means
the amount written into the data is the amount to have as
balance into the column of adjusted trial balance. The
amount to be debited and to be credited should be
calculated by taking the amount into the TB minus the
amount given into data
• 3. Accrued revenue and accrued expense, you will use the
amount given into data without any change.
Assignment in you respective groups
Accounting 9th ed. Page 183
Assignment in you respective groups
Accounting 9th ed. Page 189